TIMING IS crucial when buying property, and if you need to make a purchase quickly, it isn’t always possible to get a mortgage approved in time. A short-term bridging loan is an alternative that’s faster but works very differently.
If you are purchasing a property funded from the proceeds of the sale of another property, but the sale cannot be completed before or at the same time as the purchase, short-term finance may be required in order to bridge the gap so that the purchase can still proceed.
Bridging loans can also provide the most convenient option for raising the required funds. In addition, they have flexible lending criteria so that approvals can be given quickly without extensive checks, and they can be secured on all types of property, including property that is unsuitable to other lenders.
The world of bridging loans is completely different to a normal mortgage, so use a specialist bridging finance broker to help you.
How quickly can you get a bridging loan?
WHAT IS A BRIDGING LOAN?
A bridging loan is a type of secured short-term financing that’s sometimes used when buying property. As the name implies, it’s designed to bridge a gap between the time you buy a property and a moment in the future when you expect to be able to repay in full.
The most common use of a residential bridging loan is when you would like to purchase a new property but have not sold your existing property. In these cases it is possible to take out a short-term loan that can be repaid when your old property is sold.
Financing auction properties can also be a bit tricky so auction bridging finance can be used for the initial purchase. But actually these loans can be used for almost any purpose, making them incredibly useful.
Planning gain bridging loans allow you to buy a property while you wait for planning consent approval.
The lender will be very interested to hear how you will pay them back, here are some successful strategies for repaying a bridging loan.
WHO CAN GET A BRIDGING LOAN?
You’ll need to be a UK resident over the age of 21 to apply for a bridging loan. Usually, bridging loans are mostly used by property developers or investors rather than residential buyers.
Bridging lenders base most of their decisions on the property and the exit plan. This means that if you have the odd blemish on your credit file it should not affect your application. We have a separate article that covers getting a bridging loan with bad credit.
They are available to individuals, partnerships and companies including SPV‘s.
REGULATION
The UK mortgage and loan market is regulated by the FCA. When arranging a residential mortgage for your home this will always be classed as regulated and consumers will benefit from the protections that the FCA provides.
A bridging loan can be classed as regulated or unregulated depending on how it is to be used.
For it to be regulated, a bridging loan will be secured against a property that you currently live in or intend to live in. Needing a regulated loan will reduce the number of lenders and restrict the loan term to just 12 months.
The following article explains this in more detail: Are bridging loans regulated by the FCA?
HOW MUCH CAN YOU BORROW?
Like mortgages, bridging loans are based on a ‘loan-to-value’ or LTV ratio. You can usually borrow at a maximum LTV of 60-75%, meaning you can borrow between 60% and 75% of the value of your property.
For a £200,000 property, for example, this is between £120,000 and £150,000.
Usually, you can borrow at the top end of this range if you don’t also have a mortgage on the property, and at the lower end if you do have a mortgage. This is because both the mortgage and the bridging loan are secured on the same property.
If you fail to make your repayments, your mortgage provider has a higher priority claim to that property and any money made from its sale.
A bridging loan on a property with no mortgage is called a ‘first charge’ bridging loan, while a loan on a mortgaged property is called a ‘second charge’ bridging loan.
Due to their flexibility, it is also possible to arrange a cross collateral bridging loan, where the loan is secured on more than one property, with the aim of increasing the amount available to borrow.
VAT Bridging Finance can be used to cover the 20% VAT payment when buying a commercial building, this is not included in a commercial mortgage facility. Read about how much you can borrow with a VAT bridge.
WHEN WILL YOU NEED TO REPAY A BRIDGING LOAN?
Rather than making monthly repayments, you will pay off the loan in full, including any accrued interest and fees, before the agreed term. These loans are commonly set up for periods of between 3 months to 24 months.
When assessing your application the lender will ask for your exit strategy. This is ‘how’ you will repay them, and it needs to go into some detail. Read our article What are some common exit strategies for bridging loans? to learn more.
There are two types of bridging loan with different repayment terms:
CLOSED BRIDGING LOAN
If you take out a closed bridging loan, you’ll have a set date on which to repay it. This might be linked to the completion date for the sale of this or another property.
OPEN BRIDGING LOAN
If you take out an open bridging loan, you won’t have a fixed repayment date, but will usually be required within a certain period, e.g. one year.
Which type of loan you choose will depend on how you plan to raise the capital to repay it.
WHAT HAPPENS IF YOU’RE UNABLE TO PAY?
Your bridging loan will be secured on a property, so if you fail to repay the loan, the property will be repossessed and sold to pay off your debt.
HOW MUCH ARE THE FEES FOR A BRIDGING LOAN?
Usually you’ll pay an arrangement fee, as well as a monthly interest charge. These are quite a bit more than most mortgages, so you won’t want to take out a bridging loan for longer than you need to. Most people consider that bridging loans are expensive but there isn’t really much to compare it to.
The interest is not paid monthly, it accrues each month and is expected to be fully repaid at the same time the main debt is paid off.
Bear in mind that you will also need to pay valuation fees, administrative fees, redemption fees or exit fees, so always get your mortgage broker to compare the total costs when you’re choosing a bridging loan.
